Small businesses: Get smart about sales to survive

As the economic gales continue to blow, veteran small business survivors argue getting smart about sales can help firms get through tough times.

There is simply no one who can tell us how we are going to get out of the current global economic mess we are in.

Speculation about this thing the commentators call "meltdown" merely ramps up anxiety levels, as do most attempts to apply graphic metaphors to economic, political or social upheavals.

So instead of probing the economic gloom, businesses all need to turn their attention to survival.

Most of us do not live in that world of financial frenzy that makes the headlines all the time, and our connection with politicians and policy makers is pretty remote.

The only thing you can do in a crisis that groans on and on, as this one is doing, is to knuckle down and get on with the job, assuming there is still a job to be had.

That is true of big organisations, but even truer of small businesses who can think themselves into a blue funk every time they read the headlines.

It is times like this that I think of a man called Brian Warnes, who sadly died earlier this year.

Thirty years ago, apparently over one weekend, Brian wrote a book called "The Genghis Khan Guide to Business".

A memorable title, I think chosen mainly for that memorability rather than much relevance to the text.

Twice when recession bit in the past, In Business called on Brian Warnes to come up with a survival strategy for small businesses plunged into uncertainty.

His message was a basic one: cash flow is king, and - strange though it sounds - many business people do not understand where the true profitability of their business lies.

Many businesses concentrate on increasing turnover. His advice was quite straightforward:

"Understand your business, measure where your break even point is and unless you close the gap you'll go bust.

"If you drop break even point to under today's sales, however grim they are, then you build almost indefinite life into the company and it can see through a very long recession."

They fail to realise that some, maybe much, of the work they take on or the orders they book may suck up overheads without delivering proper profits.

In particular, some small businesses manage to ignore the cost of working capital: what it costs to get the raw materials in goods and services that the business needs to function with.

This ignorance of the cost of working capital goes some way to explaining why the end of a recession is normally accompanied by a rise in corporate bankruptcies among small and medium-sized businesses.

By luck or good management they have edged their way through the downturn, conserving cash and paring expenses.

But then comes the notorious green shoots of recovery and new orders start to come in.

That is when a hunkered-down firm suddenly needs more working capital to restart a mothballed production line or purchase extra raw materials.

And that is when companies are particularly vulnerable to orders that go wrong, or late payers, or banks still under orders from head office not to take risks.

The green shoots of recovery are a dangerous time for a business, but so is the here and now of recession lingering on, maybe recurring as we go into 2012.

Brian Warnes had an almost forensic eye for company accounts, and he would sometimes urge his clients to get rid of some of their business because it was not profitable.

Turning down orders in hard times sounds counter-intuitive, but to Genghis Khan it made sense.

I went round a company making cleaning chemicals for supermarkets to sell under their own brand name.

The store chains ground down their suppliers, of course, and the working capital required was simply not being paid back out of profits on the orders.

But this little company also had one or two similar brands of its own, and it made good money because the firm was much more in charge of its own fortunes when it sold its own products with its own brand names attached.

Brian Warnes' advice was "drop the orders that don't pay and concentrate your efforts on the lines that do".

Not rocket science, but it seems to work. At least that is what the company bosses told me then.

Unfortunately I could no longer ask Brian Warnes for advice, so I went to a business advisor much influenced by Brian and that Genghis Khan Guide.

Colin Fittall of the Bottom Line Impact consultancy takes a similarly forensic approach to examining small businesses, their cash flow and balance sheets.

He and his clients agree that many business people are so involved in the day to day running of their firms that they lose sight of the financial details and of the world they are operating in.

"Many people have the mistaken belief that they see break even in terms of their total costs," he argues. "So their whole mindset is 'if I sell this much then I know we'll cover our costs', and where that takes them is that the answer to any problem is to grow their sales or cut their costs and that mindset is wrong.

"You need to have a wide enough gap between your actual sales and the sales that your business needs to break even.

"That means that you don't go out there and chase bad sales to accelerate sales at a time when you are going to secure those sales on weak margins and poor payment terms."

What they need - and think there is no time to do - is to stand aside for a few hours, examine the cash flow and the prospects, and think just a little about how the business they created really works, and what pays.

In a crisis such as the one that we are experiencing at the moment, a little self-knowledge is very valuable indeed.

In Business is on BBC Radio 4 on on Thursday 24 November at 20:30 GMT and Sunday 27 November at 21:30 GMT. Or listen via the Radio 4 website or download the programme podcast.